Sunday, October 29, 2017

Accounting industry fact of the day

The erosion of values and institutional relationships that underpin capitalism has been a constant theme of this blog. The cozy and entrenched relationship between big businesses and and their auditors is another example.

All but three of the US’s 500 largest companies use the Big Four accounting firms — Deloitte, PwC, KPMG and EY — and many of them have used the same one for decades. According to data compiled by MSCI, 42 of the big US companies that disclose auditor tenure have hired the same firm for more than 10 years, with an average of 24 years on the job. The UK’s 300 biggest companies are similar — 44 per cent of auditors have been on the job for more than 10 years, with an average tenure of 17 years. Most companies like dealing with the same auditor year after year — fewer things have to be explained, and audits can be completed faster. But critics say these long-lasting relationships can become too cosy and lead auditors to lose their scepticism. They point to UK telecoms group BT, which endured two accounting scandals in nine years while using PwC, whose work is now being probed by the UK accounting watchdog (PwC says it is co-operating, and BT has now changed auditors after 33 years). US lawmakers, meanwhile, have asked for an investigation of KPMG’s work for Wells Fargo during that bank’s fake accounts scandal. KPMG, which has had the account since 1931, has defended its work.

In recent months, the US, UK, and EU have taken some tentative steps to usher in greater transparency into auditing. They include bidding out audit contracts after ten years, changing auditors after 20 years, disclosing auditor tenures, and outlining "critical audit matters" and their resolution.

Maybe there are compelling reasons, but I struggle to understand why auditors should not be procured by bidding every three years. It is more likely a case of captured regulators choosing the convenience of corporate interests over the concerns of conflicts of interests.